Posts Tagged ‘Congressional Budget Office’

306

The US economy has not been good at exporting for some time. Recent data shows that its imports of goods and services still lag way behind exports. Yet there is one thing the US is good at exporting and that is economic news. And of late it has been exporting good economic news. So what is it; why; is it for real, and does that give us reason for hope?

Sometimes recoveries seem to be built on hot air. Sometimes they are down to confidence, and confidence creates growth, and growth creates confidence. During the boom years of the noughties, economic boom was built on debt. Households borrowed because house prices were up, and they rose partly because interest rates were so low, and partly because credit was so easy to come by, but there was something wrong.

The boom was built on foundations as shaky as a shaky house built of shaky match sticks, sitting on top of shaky hill made from quick sand. This time the recovery seem to sit on foundations that are a lot more robust. Yet still the doubters say it is all a lie.

So why the reason for cheer?

First and foremost, US households have cut debt. US household debt has fallen from $12.7 trillion in 2008, to $11.2 trillion at the end of last year. In fact, according to IMF data, US household debt to income has fallen from a ratio of 1.3 in the mid-noughties to around 1.05. In fact, the ratio is now higher in the Eurozone. At the same time, the value of US household assets have risen. According to Capital Economics: “Every $1.00 of debt is now backed by $6.30 of assets, whereas before the recession it was backed by $4.80 of assets.” Capital Economics, for so long a bear on the US economy, recently said that the US consumer is now well placed to drive “a faster period of economic growth.”

Secondly, US banks are in better shape. Q1 saw record profits for US banks, while their deposit-to-liabilities ratio recently hit a 20-year high of 84.6 per cent. See: US banks see biggest profits ever: is the US back? 

Thirdly, the US fiscal deficit this year is expected to be $642 billion, or so estimates the Congressional Budget Office. To put that in context, last year the deficit was $1.1 trillion. It will, in fact, be the first time since 2008 that the US deficit is less than $1 trillion. And, by the way, not so long ago the Congressional Budget Office was projecting a deficit of almost $200 billion more than that.

As for those who say the US sits on a financial and demographic time bomb, and that surging health care costs alone are sure to bankrupt the world’s largest economy there are some reasons to be cynical about such cynicism. See: The scaremongers are wrong: the US is not even vaguely close to going bust  and US medicare time bomb begins to look more like a pretty time piece 

US consumer confidence recently hit a five and half year high. US house prices are rising, and, unlike in the UK, they are rising from a point where the average price to income is below the historical average of 1.2 million, with June seeing a rise of 195,000.

Given all this evidence, why are many so cynical?

Some cynicism seems to be built on genuine concerns, while others seem to be cynical for its own sake.

One challenge is that this year US government spending will be falling while taxes are rising. This may be good for cutting government debt, but it may yet prove disastrous for the economy, and indeed the IMF has slated the US government for relaxing its fiscal stimulus too soon. But then that is what you get when you have a political system made up of two parties that seem to be hell bent on putting self-interest over national interests.

Partly as a result of the US fiscal stimulus’ going into reverse, recent  Purchasing Managers’ Indices (PMIs) have been disappointing, with the latest PMI tracking US non-manufacturing falling to a three year low. The latest PMIs suggest the US will grow at around 1 per cent in Q2 on an annualised basis. By recent standards, that is poor. But then these are problems with the short term.

Another challenge relates to the very difficult balancing act that the Fed has to manage. It is now talking about cutting back on its quantitative easing or QE programme quite soon – September being the date expected by the markets. The Fed has been buying $85 billion worth of bonds every month. To begin with the Fed will not stop QE, but merely slow down. The feeling is that it won’t stop altogether until next year, and rates won’t rise until 2015.

Not all see why. For one thing US inflation is modest, and appears to pose no threat at all. Fears that were commonplace a year or so ago, that QE would lead to runaway inflation currently look somewhat silly. So they ask: why cut rates so soon?

A more serious concern relates to ways in which the actual data may be misleading. So sure, US employment may be up, US unemployment may be falling, but US employment to the US population is not much less today than during the height of the recession. In part this is down to more people retiring, but it appears this is also partly down to some people pretty much giving up, and falling off the unemployment stats.

Then there are some who voice concern over student loans in the US. The big critic here is Nobel Laureate Joseph Stiglitz. See: Student Debt and the Crushing of the American Dream

This all leaves two big pluses.

The first plus is shale gas. This has led to falling energy costs, handing US households more disposable income after paying for energy. The second is signs of a kind of renaissance in manufacturing. This shows up in many ways. Both Apple and Google, for example, have recently announced that certain products will be made in the USA.

As US productivity rises, unit labour costs fall, and unit labour costs in China rise, the gap with China improves in favour of the US. More exciting is the potential of 3D printing, which may yet create a new kind of local craftsman, as is suddenly becomes viable for consumers to have bespoke products designed especially for them, or for just a small number of people.

A sustained US recovery is not guaranteed, but the odds are about as favourable as they have been for a very long time.

© Investment & Business News 2013

As you know the US is effectively bust. There is a long list of perennial bears on the US economy who claim that commitments to future medical care costs mean the US is living off borrowed time.

They produce their calculations of woe like this. They look at how medical care costs have risen in past years (and they have shot up), and assume they will carry on rising at this rate. They then take an estimate for total expenditure over the next half a century or so, or indeed even longer, and then apply a rate of interest to calculate a net current value.

Using a formula based on those principles, last autumn Chris Cox and Bill Archer penned a piece for the ‘Wall Street Journal’ saying: “The actual liabilities of the federal government – including Social Security, medicare, and federal employees’ future retirement benefits – already exceed $86.8 trillion, or 550 per cent of US GDP.”

Dambisa Moyo wrote in her book ‘Why the West has lost: “If nothing else changes it from its current path, it is almost certain that America will move from a fully fledged capitalist society of entrepreneurs to a socialist nation within a few decades…The trouble is, it won’t be just any socialist welfare state … the US is on the path to creating the venal form of welfare state (poorly developed and designed) – one born of desperation from many years of flawed economic policies and a society that rapaciously feeds on itself.”

But supposing something else does change. Supposing the retirement age in the US rises by a couple of years, or supposing a modest consumption tax is introduced in the US, like VAT but much lower.

Then the time bomb won’t so much explode as go pftt, like a damp box of fireworks on a very rainy bonfire night.

Then there are medical costs. Medical costs in the US are expensive and, apparently the whole sector is meant to be pretty inefficient.

The projections of woe assume that medical costs will carry on rising at a rate well in excess of inflation.

It’s all a little odd, because the inflation rate for US medical care costs in May was 2.2 per cent year on year, which was a fifty year low.

Pftt. Did you hear that? It was all those predictions of doom going up in smoke.

© Investment & Business News 2013

259

It’s a bit odd isn’t it? How can you reduce debt by spending more? That great raconteur of our times George Osborne likes to point out the evident ridiculousness of such an idea. With that cheeky grin of his, he says: “I don’t believe you can cut debt by spending more.”

And yet, despite the silliness of the very suggestion, UK debt is not falling. It is not like that in the US, however, where the government has been far more Keynesian in its approach.

The US deficit this year is expected to be $642 billion, or so estimates the Congressional Budget Office. To put that in context, last year the deficit was $1.1 trillion. It will, in fact, be the first time since 2008 that the US deficit is less than $1 trillion. And, by the way, not so long ago the Congressional Budget Office was projecting a deficit of almost $200 billion more than that.

Looking forward, the deficit is expected to fall even further, dropping to $378 billion in 2015.

The good news does not stop there, however. US household debt has fallen from $12.7 trillion in 2008, to $11.2 trillion at the end of last year. In fact, according to IMF data, US household debt to income has fallen from a ratio of 1.3 in the mid-noughties to around 1.05. In fact, the ratio is now higher in the Eurozone.

Back to the public deficit, and two main factors explain the fall. The expiry of George Dubya Bush’s payroll tax credit means more income is coming in. Recovering US housing prices mean the US government expects a windfall from Fannie Mae and Freddie Mac.

You would expect cheers over the news in the US, wouldn’t you? Well no doubt Mr Obama is cheering, but oddly economists and politicians on the left and right are fretting.

On the right they don’t like it. They fear that they are losing the moral high ground. How can they demand tax and spending cuts to get debt under control when it is falling so fast anyway? The truth is that the arch Austerians have a philosophical problem with any form of government spending except on perhaps on law, order and defence. They want to see cuts, whatever is happening to debt.

On the left, they don’t like it because they think the US needs more government spending; it needs more Keynesian policies, and the fact that debt is falling is symptomatic of a lack of government stimulus.

In the longer term two problems remain.

By the mid-2020s government debt is expected to rise again as the baby boomer generation retires – this problem can be overcome, however, by raising the retirement age.

A more serious challenge may relate to the burgeoning level of student debt. Nobel Laureate Joseph Stligtz reckons this is the next debt crisis in waiting. See: Student Debt and the Crushing of the American Dream

© Investment & Business News 2013